The world’s largest maker of generic drugs has pledged to
cut costs by as much as $2 billion in the next five years as
part of a new strategy to increase long-term profitability. Part
of those savings will probably need to come from Israel,
according to Ronny Gal, an analyst at Sanford C. Bernstein & Co.

“I don’t see how they can meet their sizeable cost cut
goals without cutting costs in Israel significantly,” Gal said
at an annual conference organized by Tel Aviv-based health-care
hedge fund Sphera Funds Management Ltd. “Cutting costs here in
Israel is going to be a true test for them.”

Laying off workers or closing down factories in its home
market may be politically challenging for Petach Tikva, Israel-
based Teva as it faces pressure over tax payments from Labor
leader Shelly Yacimovich, who has called on the Finance Ministry
to investigate the issue. Israeli newspapers including Globes
and TheMarker criticized Teva’s tax contributions last month
after an annual statement showed the company paid about $5
million, or less than 1 percent of annual income, in taxes for
2012.

Teva, Israel’s largest company by market value, said its
total contribution to the state is greater than that and its
operations in Israel generate tax revenue of more than 3 billion
shekels ($806 million).

‘Unbearable Situation’

It will now have to balance a desire to protect its public
image with an obligation to keep investors happy as intensifying
competition eats into sales of best-selling multiple sclerosis
treatment Copaxone and weighs on profit.

The political backlash against Teva echoes that felt by
U.S. retailers Amazon.com Inc. (AMZN) and Starbucks Corp. (SBUX) after they
were singled out by U.K. lawmakers last year for not paying
enough corporate taxes in Britain.

“We think it’s outrageous,” Elli Gershenkroin, economic
adviser to Yacimovich, said in an interview. “Even if it’s
legal, it’s an unbearable situation that has to be stopped and
measures have to be taken to correct the situation.”

The private sector’s contribution to the state has been
under the microscope since Finance Minister Yuval Steinitz
announced plans to cut 14 billion shekels from its proposed 2013
spending. The budget deficit reached 4.2 percent of gross
domestic product last year, more than twice the government’s
target, as the nation’s economic growth slowed to an annualized
2.5 percent in the fourth quarter, the slowest in more than
three years.

Not Sacrosanct

While debate continues over the size of Teva’s tax bill,
the scope of the company’s operations in Israel may not be
sacrosanct, said Jonathan Kreizman, an analyst at Clal Finance
Batucha Brokerage Ltd. “The new management has definitely shown
they are trying to make the company more global,” he said. “I
don’t think the type of presence the company has here can
completely be taken for granted.”

Two of Teva’s eight largest manufacturing facilities are
based in Israel, with the Kfar Saba and Jerusalem operations
employing more than 1,700 workers between them. Teva also has a
pharmaceutical ingredient facility in Ramat Hovav and other
sites across the country. At the end of 2012 about 16 percent of
Teva’s 45,948 employees were based in Israel.

Collective Agreement

Teva is required under its contract with workers to
negotiate with labor unions before cutting jobs, Dafna Cohen-
Nouriel, spokeswoman for the Histadrut labor union federation,
said by phone.

On its strategy day on Dec. 11, Teva outlined its cost-
saving plans without identifying locations where plants or jobs
may be at risk. The company said most of the savings would come
from streamlining operations after a string of multibillion
dollar deals, including the 2010 $4.9 billion acquisition of
Ratiopharm GmbH, based in Ulm, Germany, led to inefficiencies.
Still, the company said it will seek as much as $120 million in
savings by moving some operations from high- to low-cost
locations.

“We are looking across our business globally for the
savings that we have outlined,” Hadar Vismunski, a spokeswoman
for Teva, said in e-mailed comments. “With regard to our
manufacturing network, we are reviewing and evaluating all the
sites in our network for their cost-competitiveness.”

Deliver Savings

Vismunski did not specify whether Israel would be
categorized as a high- or low-cost location. “We are committed
to our Israeli operations and to significant investment in
Israel,” she said.

Teva hired Carlo De Notaristefani, a former Bristol-Myers
Squibb Co. (BMY) executive, as global operations head last year to
help deliver savings. De Notaristefani’s job has been to see how
to make Teva’s 74 manufacturing plants, eight of which are in
Israel, more cost-effective.

When Goldman Sachs analyst Jami Rubin asked Teva Chief
Executive Officer Jeremy Levin on a second-quarter earnings
conference call what the new hire would do about the factories,
Levin reminded her of De Notaristefani’s track record at
Bristol-Myers: he cut the number of plants by more than 50
percent to 12 from 28.